Economist Luiz Fernando Figueiredo, former director of the central bank and chairman of the board of Jive Investments, an asset management company specializing in troubled assets, maintains a cautious stance on the fiscal policy that will be implemented by Lula and the impact it will have on the country’s economy.
Although he claims that the measures announced last week by Finance Minister Fernando Haddad should reduce the primary deficit and slow the growth of public debt, he prefers to pay to see if the promises of a fiscal balance from 2024 will be fulfilled, become reality. “It’s one thing for Haddad to say ‘I will bring fiscal stability.’ It’s another to get the president and the PT to do it,” he says. “Only time will tell what will happen.”
According to Figueiredo, however, Haddad’s closeness to President Luiz Inácio Lula da Silva and the support he has from Planning Minister Simone Tebet could help him accomplish the task. “Haddad is very, very close to Lula.
In this interview with Stage, Figueiredo also says that the independence of the central bank should act as a “brake” on an expansionary fiscal policy by the government and argues that any “reversal” of the liberalization measures implemented in recent years could be “a disaster”. “Changes in sanitation and labor reform – unless it involves updating and modernizing legislation – can be a bad sign that, in Brazil, the rules of the game can change at any moment.” other, which is bad for long-term investment.”
Like mr. Evaluate the first movements of the Lula government in the economy?
The government got off to a bad start. Even before taking over, structuring itself, it has already brought the country an extraordinary additional cost, of around R$ 200 billion in 2023 alone, with the so-called Transition PEC, approved by Congress. It’s commendable that the government wants to honor campaign commitments, but doesn’t need to honor everything on the zero date or throw together a bunch of trinkets. This PEC has taken us far from fiscal balance. Furthermore, after Lula spoke about an alleged conflict between fiscal stability and social responsibility shortly after the election, the projected cost of rolling over the public debt increased from R$100 billion to R$150 billion as interest rates futures market interest soared. So, this start was very bad.
Why has investor reaction to the PEC Transition been so negative?
Because it is not possible to dissociate fiscal balance from social responsibility. We must understand that Brazil has a debt that is the highest among emerging countries and does not have a fiscal situation that allows us to keep this debt in a certain balance. To have stable debt, we need to have a primary surplus of around 2% to 2.5% of GDP annually. However, this PEC has generated a deficit of between 1% and 1.5% of GDP, bringing the fiscal gap in 2023 to over 3% of GDP, and has left us further from a sustainable debt.
After that speech by Lula that Mr. quoted, there is also a very strong loss in market value of companies with shares listed on the Stock Exchange. How are we supposed to understand this?
Whenever the stock market goes down a lot, it’s because economic agents predict that the economy will suffer further down the line. When the stock market goes up a lot, they expect the economic environment to improve. After Lula’s speech, all assets – the yield curve, the exchange rate and equities – have suffered greatly, due to a loss of confidence in what will happen, especially with state-owned companies listed on the stock exchange.
Now, how does all this affect the real economy: economic growth, investment in production, consumption?
This generates an increase in future costs: more inflation, more interest and finally even more tax burden, to cover the fiscal deficit. Businesses are already suffering greatly from high interest rates. If rates stay high for longer, due to an expansionary fiscal policy, insolvencies will also rise much more than previously thought. When confidence in a better future decreases, investment, which reached 20% of GDP in 2021 and 2022, also tends to decrease. Investing and consuming, making progress, presupposes a certain security, something that this PEC has reduced, instead of increasing. Therefore, when I look at the consequences of a PEC of this type, I hardly see a positive result, one that helps socially, because you give with one hand and take away with the other.
To what extent have the fiscal measures announced last week by Finance Minister Fernando Haddad changed this perception?
It is not possible to take the measures announced by the minister at face value, R$ 242 billion. But, when we realistically assess the fiscal impact these measures will have, we arrive at a very reasonable number. On our account, it will be about R$ 150 billion. This should reduce the primary deficit to something between -0.5% and -1% of GDP. It’s still not a good scenario, but it’s definitely a best-case scenario. The fiscal framework that will replace the expenditure ceiling still remains to be defined. Minister Haddad said the new framework would follow. It is the least that is expected of us to have an environment of stability, to move forward and not backwards, making the social agenda workable. Now, this is something that we have yet to see what happens, know what the fiscal rules are going to be that are going to get us into this debt sustainability situation. The sooner it arrives and the more robust it is, the lower these costs and this loss of trust will be.
The problem is that, even with the measures announced by the government, the public debt is destined to continue to grow considerably.
There is no doubt that the debt will grow further, not only due to the primary deficit, but also due to interest rates, which are very high, to reduce inflation. Even so, debt is expected to increase less than expected. Before the announcement of the fiscal measures, the forecast with the approval of the PEC was that the public debt would pass from 74% of GDP to 82/83% of GDP at the end of the year. Now, the forecast is that debt will likely be just below 80% of GDP, but closer to 80%. It will still be a huge leap in just one year, without the extraordinary expenses incurred in 2020, in the midst of the pandemic, but a little smaller than imagined. Unsurprisingly, markets in Brazil have improved since the announcement of the package.
In recent days, both Minister Fernando Haddad and Planning Minister Simone Tebet have strengthened their commitment to the search for fiscal balance. How should this affect this image?
If what they say is translated into concrete facts and actions, we could be faced with a reversal of the scenario. If the promises that by 2024 we will no longer have deficits are kept, we should return to a scenario of reasonableness, at least in the trajectory of public finances. But for now, it’s just talk. Will these two ministers be able to convince the president and the political area of the government to follow this path? It’s one thing for Haddad to say “I will bring fiscal stability.” Another is that he managed to get the president and the PT to do it. After all, it is useless to want and fail to convince the government internally. Only time will tell what will actually happen. Now, Haddad is very, very close to Lula. This counts plus points. Another thing that counts in favor is the Minister of Planning, with whom Lula has a certain political commitment, being together with Haddad in this enterprise.
In this context, what impact should central bank independence have? To what extent should this change what we have seen in the Dilma government, when there was a lot of questioning about possible political interference in the management of interest rates and the exchange rate?
The independence of the Central Bank ends up being a brake so that the context does not deteriorate further. Today, this is proving to be something fundamental. In 2014 I wrote an article on the subject, in which I said that the autonomy of the Central Bank should be called the Monetary Accountability Law. Now, Brazil has an institutional framework that other countries that have gone broke don’t have, and that will help us if this government’s economic agenda is really bad. The autonomy of the central bank is a good example of this. Also the discussion on the Transition PEC. First, they wanted the spending increase to last for four years. Then they went to two and finally ended up accepting one.
Despite the official denials, many still fear that the government will promote a “reversal” of the liberalization measures approved in recent years, such as labor reform and new benchmarks for toilets and railways. What is your opinion on this issue?
I don’t know if there will be a repeal. If the government proceeds in this way, I believe there will be many difficulties for this to happen. Now, the further we get into the field of repeal, the more Brazil will go backwards. Making changes to the health care framework and labor reform – unless it involves updating and modernizing the legislation – can be a very bad sign that, in Brazil, the rules of the game change at any moment, which is bad for long-term investments.
Finally, in the light of all this, what are your expectations regarding the Lula government on the economy?
What I would like to point out, which I think is important, is that we are not doomed to go into a recession, have much higher inflation, higher interest rates, etc. All of this can be changed. We are in a reversible situation. When economic agents – people, companies, investors, foreign investors, society as a whole – realize that stability is something the new government really values, all the costs initially generated tend to become zero, as the market has already reported in recent days, after the announcement of fiscal measures by Minister Haddad.
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